Under IRC Section 1031, it has always been allowable to defer gains from the sale of property in one state by replacing it with like kind property in another state.  However, if that replacement property is ever sold, the gain that was deferred from the first state is supposed to be reported and paid to that state.  That has pretty much been handled on the honor system for sellers to voluntarily report to the previous state.

It appears that the rulers in Sacramento don’t much trust this honor system for former investors in California property and are now instituting new requirements for those sellers to keep in touch with the FTB every year until the replacement property is sold. Because the replacement property may be exchanged for another like kind property, and on and on, this could go on for several decades. In fact with the popular “swap til you drop” technique of investing, it is possible that there will never even be a taxable sale of the replacement property.

 As explained in this article from the most recent FTB newsletter, this rule takes effect as of January 1, 2014; but they are still working out the details as to the exact forms and procedures for the annual notification filing. Since this situation applies to many of our clients, who disposed of California property and reinvested into other states, this is something that I will be dealing with for a long time to come; so I will be commenting on any interesting new developments as I learn of them.